Asia Asserts Itself—Especially with Outbound Deals

Asia Asserts Itself—Especially with Outbound Deals

          
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Asia Asserts Itself—Especially with Outbound Deals

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    In This Article
    • Asian companies are moving up the value chain by buying technology, brands, and other valuable assets in developed nations.
    • In the past decade, the value of Asia-to-established-market deals rose by 11 percent a year on average. Deal numbers rose by 6 percent a year.
    • China’s share of Asia-to-established-market deals was 15 percent from 2006 through 2011, up from 11 percent from 2001 through 2005. 
     

    The 2012 M&A Report

    Divestitures aside, there is still a need to sharpen the pencil and do a better job of preparing to make acquisitions. There’s plenty of pencil sharpening going on in Asia these days. The two-decade growth in the number of acquisitions worldwide by companies from the Asia-Pacific region did not gear down much in 2011. Although M&A growth in the region was sharpest from 1999 through 2003, it remains robust—for a host of reasons. (See Exhibit 1.)

    exhibit

    But first, let’s consider the context. Overall, M&A activity in 2011 was still dominated by Western companies; Asian buyers were involved in about 14 percent of the deals, just slightly less than in 2010. The value of Asian deals was about 15 percent of the global total.

    Hunger for Established-Market Targets

    On the basis of their sound economic fundamentals, dynamic Asian companies with growing appetites for M&A are no longer snapping up targets in emerging markets only. While Asian challengers grow rich with cash and more sophisticated, they have been looking at the established U.S. and European markets. They are moving up the value chain to acquire technology, natural resources, brands, and other valuable assets. Established markets still account for a minority of deals by Asian acquirers and a very small share of all deals globally, but that is changing. In the past decade, the number of Asia-to-established-market deals rose by a CAGR of 6 percent, while the deal value rose even faster—11 percent per year. For comparison, both the number and the value of Asia-to-nonestablished-market deals grew at just 4 percent annually.

    But within the region, there are huge differences in the nature of the deals being pursued. Developed markets such as Japan are still in the M&A game, but because of the nation’s lost economic decade, Japanese acquisition activity merits far less attention than it did during the 1980s and 1990s, when Sony and Matsushita bought Hollywood movie studios and tire maker Bridgestone bought Fire-stone. There are differences, too, in established-market acquisitions. Companies based in Singapore, Hong Kong, and other Asian countries lost share in the Asian outbound-acquisition category over the course of 2011—and continue to lag in that respect—while India and China were and continue to be very strong outbound players.

    India’s Acquisition Appetite

    Indian companies have been expanding their share of Asia-to-established-market deals over the past ten years. Indian acquirers accounted for 39 percent of that subcategory of Asian deals from 2006 through 2011, up from 33 percent from 2001 through 2005. Many of these buyers are looking for access to customers and superior technologies, and they have had a particular appetite for British targets. For instance, in 2007, Indian cable maker Paramount Communications purchased AEI Cables, a 170-year-old maker of cables in the U.K., and in 2009 Samvardhana Motherson Group acquired Visiocorp, a British automotive-mirror company. But perhaps the most telling example is Tata Motors, which in 2008 paid Ford $2.3 billion to buy car brands Jaguar and Land Rover. This marked the first major appearance of an Indian automaker in the Western world.

    At first, investors deemed the deal a strategic failure, resulting in a CAR of –8.8 percent. Tata Motors shares underperformed the broader automotive index for a year, as Tata experienced a loss caused by a slump in Land Rover sales, which drained cash flow. However, the acquisition proved ingenious once sales of luxury vehicles rebounded. Jaguar Land Rover accounted for 95 percent of Tata Motors’ 2011 profits, and 63 percent of Tata Motors’ sales were from outside India, up sharply from 18 percent in 2008. Tata Motors generated an impressive 15 percent operating-profit margin, compared with 2011 margins of 12 percent for BMW’s automotive business and 9 percent for Mercedes-Benz’s car division. 

    The Strategic Rationale Behind China’s Moves

    If India has been Asia’s outbound-acquisitions tiger, China has been, yes, its dragon. Chinese companies have been very aggressively pursuing outbound transactions in North America and Europe since 2007. China’s share of Asia-to-established-market deals was 15 percent from 2006 through 2011, up from 11 percent from 2001 through 2005.

    Behind China’s assertive moves lie crucial factors that business leaders in the rest of the world must not ignore. China’s Twelfth Five-Year Plan—the national government’s official economic policy—calls for the development of seven strategic industries: energy savings and environmental protection, new information technology, biotechnology, high-end equipment manufacturing, new and renewable energy, new materials, and new-energy vehicles. The government claims that the value-added output of these industries will increase to 15 percent of China’s GDP by 2020.

    Technology executives worldwide have no doubts about the seriousness of China’s intentions. According to a recent survey, they believe that China’s investments in innovation put the nation in pole position to deliver disruptive technologies very soon. The upshot for M&A: in many cases, Chinese companies whose outbound-acquisition activity supports the nation’s strategic objectives are less concerned about return-on-equity numbers than about the long-term strategic significance of what they’re bidding on. For many potential sellers in the developed world, that perspective can seem quite alien. But it is crucial to acknowledge it.

    There are plenty of examples of this strategic quest in action. Both Sinochem Group and China Petroleum & Chemical, for instance, have made major oil acquisitions in Latin America. China Aviation Industry General Aircraft has expanded its technical capabilities by buying U.S.-based Cirrus Aircraft, and Dicastal Wheel Manufacturing, a maker of aluminum alloy wheels, followed a similar logic with its acquisition of Germany’s KSM Castings.

    One of the best examples of China’s strategic approach to acquisitions is the recent purchase of Putzmeister Holding by Sany Heavy Industry, one of China’s leading construction-equipment makers. It is not the first acquisition of an advanced-engineering company by a Chinese concern, and it is not likely to be the last.

    Together with CITIC PE Advisors, a Chinese PE firm, Sany is purchasing 100 percent of Putzmeister. The German company’s hometown will become Sany’s new headquarters for concrete machinery. Sany is reported to have already invested more than $160 million in factories in Germany and the U.S.

    Sany’s move is just the latest in a string of acquisitions of storied German engineering companies by Chinese companies. Goldwind, a Chinese wind-turbine manufacturer, bought Vensys in 2008 in order to develop bigger turbines for its domestic market. Kiekert, a maker of automotive door-lock systems, has been sold to Lingyun Industrial Group, a subsidiary of China North Industrial Group, which is a government-owned conglomerate that manufactures motorcycles, cars, trucks, machinery, and military weaponry. Chinese solar-panel maker LDK Solar plans to buy Germany’s Sunways.

    “The Chinese are no longer just buying up nearly bankrupt consumer-electronics manufacturers or second-class solar companies, as has been the case in recent years,” noted a recent article in Der Spiegel. “Instead, they are now setting their sights on the ‘hidden champions,’ the low-profile global market leaders that are typical of German industry.”

    If today’s economic fundamentals are any guide, Asian companies’ shopping tour is all set to roll onward. There’s a strong correlation between GDP growth and deal value growth, and the forecast for economic growth over the next five years in the Asia-Pacific region is much more positive than for growth in Europe or North America. (See Exhibit 2.)

    exhibit
    See “China Sets Growth Target for New Strategic Industries by 2015,” Xinhua News Agency, March 2011.
    See “China Projected to Be on Par with US as a Future Tech Innovation Leader; Cloud, Mobile to Drive Breakthroughs in Coming Years,” KPMG press release, June 27, 2012.
    “Buying Germany’s Hidden Champions: Takeover Could Signal New Strategy for China,” February 9, 2012, Spiegel Online International.
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